Lenders Gain Choice on Accounting for MSRs.

New York -- The FASB has finally issued Financial Accounting Standard 156, which industry sources are calling a slam-dunk victory for mortgage servicers.

The FASB said that the new standard, an amendment to FAS 140, will simplify the accounting for servicing assets and liabilities such as those created by mortgage securitization. In a nutshell, it makes it easier for lenders to hedge their mortgage servicing rights without jumping through the hoops required to obtain "hedge accounting" under the former rules. The hedge accounting tests, designed to make sure lenders can prove their hedge strategy is effective, are contained in a complicated accounting rule known as FAS 133.

And even better yet, lenders that prefer the old rules can continue to account for servicing rights using the amortization method, which requires them to book servicing rights at the "lower of cost or market" on their balance sheets. While most big lenders will make the switch to fair value accounting, it is anticipated that some smaller lenders might stick with LOCOM to limit volatility in the valuation of their MSRs.

"The board specifically designed this statement to simplify and encourage more consistent accounting in this area," said Edward W. Trott, FASB member, in a news release. "The standard is the latest step in a series of projects aimed at reducing complexity while providing an approach that allows hedge-like accounting without having to deal with the complexities of Statement 133."

Mr. Trott noted that the statement is effective for all separately ...